Chapter I: Introduction

Environmental, Social and Governance (ESG) frameworks in the present day have become a tool to judge whether the companies are acting responsibly or not. But the original thought for ESG frameworks was different, it was to check the ethical behaviour of companies and the long-term impact of this behaviour on their different stakeholders, but now the present influence of ESG metrics has impact on financial decisions and reputation of companies globally. In India the idea of ESG Principles developed recently, when Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Reporting (BRSR) in 2021 and BRSR Core Framework in 2023, which turned ESG Ratings one of the most significant parameter for analysing the governance and risk management for listed companies.

But India’s corporate sector has hit an unusual roadblock. Companies which were consistently scoring high ESG rating from international and local agencies are now being subjected to several governance problems. The Hindenburg Report on Adani Enterprises which came out in 2023 and Vedanta Ltd.’s constant violations of environmental and governance criteria presents a picture of contradictions between corporate governance failures and their high score ESG ratings. These examples lead to the fundamental question, are ESG ratings enough to be taken as a metric to judge governance? or is it just an Illusion. The companies being able to maintain high standards of ESG behaviour even when there is a lack of transparency or weak board structures, points out that ESG Ratings are now just about reputation rather than presenting a true reflection of a company’s governance identity.

The issue is important because ESG scores are now increasingly being used by investors to measure firm level risks and by regulators as a tool for obtaining accountability and sustainability in the long term. Any gap between the ESG performance and the actual governance practice may send corrupt market signals, which will mislead stakeholders and weaken the wider goal of sustainable capitalism.

Against this backdrop, this paper investigates the central question:

“Do ESG ratings in India genuinely reflect corporate governance quality, or just how good companies look on paper because of their disclosures?”

This issue is addressed in this study by a doctrinal-empirical methodology. This study combines a qualitative study of the rating methodologies and the current regulatory framework with case-study analysis of three major Indian corporations on the basis of their governance performance, namely, Adani Enterprises, Vedanta Ltd, and Infosys Ltd. The idea of selecting these corporations for this study is on the basis that they represent a cross-section of governance results, ranging from reputational crises, within a context of high ESG scores, to cases where ESG performance and governance results converge positively.

This study compares the ESG scores of various rating organizations (MSCI, Sustainalytics, CRISIL, etc.) about the governing parameters furnished in the BRSR framework provided by SEBI and also the disclosures made by various companies to see how closely ratings and actual governance matches or differs.

This study argues that ESG ratings in India have led to better disclosures and greater stakeholder awareness, but it remains systemically weak in verifying the state of governance and accountability. The last part of this study argues for a system of SEBI regulation that will lead to better regulation in the processes of rating ESG, accountability in ratings through greater methodological transparency and improvements in investor protection systems.

This study therefore aims to contribute to the growing discussion of sustainable governance through its effort to bridge the gap between the perception of what companies projects as a public image and the state of the institutional structure through which that question must be answered. It calls for a reformulation of the idea of ESG from being a mechanism of disclosure and point system to that of effective measure for ensuring ethical business conduct.

Chapter II: Conceptual Framework: ESG Ratings and Corporate Governance

Environmental, Social and Governance (ESG) ratings have become one of the most significant metrics of corporate behaviour in global markets. Far from being mere sustainability checklists, they attempt to reflect the company’s sustainable future and ethical impact on society by comparing its performance with industry peers.[1] Yet under the burgeoning interest lies a strong peculiarity. There are still no common understandings worldwide about what ESG ratings actually measure. The absence of standardised metrics and non-transparency of rating methodology continues to create discord among academics, regulators and market actors.[2]

In the Indian context, ESG evaluation became structurally relevant only after the Securities and Exchange Board of India (SEBI) made the Business Responsibility and Sustainability Report (BRSR) compulsory for the top 1,000 listed companies for FY 2022-23.[3] While this brought sustainability within the framework of mainstream corporate reporting, it did little to harmonise the frameworks operating in the case of rating providers whose common business is to opine on a particular company’s story for ESG, many of them continue to operate on the basis of self- defined indicators and uneven disclosure requirements.[4]

A. The Architecture of ESG Ratings

ESG is analysed by different rating companies through various analytical approaches. For example, MSCI has a rules-based model that rates companies from AAA to CCC depending on how well they manage certain sector-specific ESG risks.[5] In an almost inverted approach, Sustainalytics considers the level of “unmanaged ESG risk” by gauging a company’s exposure to material factors in contrast to management of the factors, producing levels of risk that can range from negligible to severe.[6] Agencies in India, such as CRISIL and CareEdge, employ much more extensive datasets and composite models which are based on more than 500 factors prior to arriving at an aggregate rating.[7]

This variation in terms of methodology is not just a question of academic interest; it has practical ramifications.[8] Empirical studies have shown that the correlation of major global rating providers often fall below the figure of 0.6, emphasising how differently rating agencies interpret the same disclosure from a particular company.[9] The disparity allows for fertile ground for “green ratings arbitrage” whereby companies can shape and time disclosures to achieve favourable ratings not supported by genuine governance reform.[10]

B. Corporate Governance: The “G” in ESG

Third of the ESG pillars, governance covers the processes and structures that reflect accountability, transparency and ethical stewardship within companies.[11] The various things that make for governance include familiar elements such as independence of the boards, audit quality, manager compensation, shareholders rights etc.[12] Despite its seeming centrality, however, governance is often surprisingly low along the scale of most ESG frameworks. Many leading indices give less than 30% of the total ESG score to questions of governance.[13]

The consequences of this dissonance are visible throughout the corporate history of India. Firms which are entangled in government controversies, such as the whistle blower complaints regarding Infosys, the infractions with regard to the environment allegedly committed by Vedanta, the checking up of the Adani group with respect to accounting and control questions, continue to have high ESG ratings.[14] This disjunction reveals a systemic tendency to accord firms more importance for the production of neat sustainability reports, rather than those which have made even a semblance of ethical behaviour based on evidence of the same. The situation has resulted in a scoring ecosystem which privileges stories rather than evidence of performance.

C. Regulatory and Empirical Context in India

The trajectory of SEBI’s efforts in the realm of sustainability reporting has been a gradual and sustained one. The Business Responsibility Report (BRR) first introduced in 2012, was followed by a more detailed effort in the form of the BRSR Core framework that was launched in 2023.[15] In the meantime, however no framework for a regulatory architecture for the rating agencies has been developed. India presently has no binding regulations relating to the methodologies, transparency obligations and conflict-of-interest provisions for ESG rating providers. The draft ESG Ratings Regulation of the European Union (2023) directly address these deficiencies as they require methodological explanations and regulatory approval and oversight. Comparative data reinforces the arguments.[16]

Research by the OECD (2022) and the World Bank (2023) finds that jurisdictions which have regulated rating markets have a greater incidence of alignment between ESG scores and actual governance outcomes.[17] India’s largely unregulated rating eco-system dominated by agencies that self-accredit, continues to provide incentives for symbolic compliance, or what scholars describe as the “greenwashing of governance.”[18]

CHAPTER III: Empirical Analysis: ESG Ratings vs. Corporate Governance Outcomes in India

The paradox in India’s ESG ratings and governance performance is highlighted in the fact that companies that are praised for their sustainable credentials have on-going governance issues.[19] The empirical assessment in this section uses secondary data analysis of ESG scores obtained from MSCI, Sustainalytics and CareEdge ESG Ratings. This data is compared with governance outcomes reflected in company disclosures and regulatory findings from 2020 to 2024.

A. Methodology

The empirical approach used consists in comparative case study analysis of three large Indian corporations, namely Adani Enterprises Ltd., Vedanta Ltd., and Infosys Ltd. These companies are chosen on the basis of (i) known availability of ESG data from more than one ratings company, (ii) corporate governance issues or controversies arising in the relevant period, and (iii) their being included in SEBI’s list of the 100 largest listed firms.[20] ESG scores were taken from publicly available databases compiled by MSCI (2023) and Sustainalytics (2024), supplemented by CareEdge ESG (2023) reports.[21] The governance outcomes were derived from annual reports, whistleblower disclosures and news reports.[22] The analysis applied a simple comparison based metric, namely rating deviation ratio (RDR), to show the inconsistency of ESG scores with regard to governance performance measures, including independence of boards of directors, audit integrity, and exposure to litigation.

B. Case I- Adani Enterprises Ltd.

The Adani Enterprises “BBB” score (MSCI, 2022) and “Medium Risk” score (Sustainalytics, 2023) continued even after the Hindenburg Research accusations raised serious questions about governance issues and an obscure format for share ownership.[23] Future inquiry from SEBI into stock manipulation and related party transactions, again, are as yet not closed, but point to deficiencies in disclosure and transparency.[24]

Nevertheless, the fact that the ESG scores for Adani continued to be stable, according to the different agencies who rated the business, indicates that the raters who analyzed the firm considered some of the dangerous governance indicia less relevant than the disclosures regarding renewable energy.[25] The analysts also pointed out that the weights given to governance in this system were not over 20% of the total score under ESG, and it produces a “governance blind spot.”[26] This rigged conclusion supports the premise that the ESG ratings as applied to firms in India reward essentially story telling sustainability rather than government measurable sustainability reform.

C. Case II- Vedanta Ltd.

The Vedanta ESG experience is another instance of inconsistency. The score for MSCI improved from B (2019) to BB (2023), and for Sustainalytics it is labelled as a “Medium Risk” firm (2023).[27] The periods before involved environmental failures of governance, as for instance the Sterlite Copper plant issue arose in Tamil Nadu, at the same time the National Green Tribunal (NGT) imposed sanctions against the Corporation for the violation of emission norms.[28] In the area of its board of management, it is noted that not more than 42% of the board is comprised of independent directors (FY 2023-24).[29] But the improvement in rating only estopped from lack of ingenuity by good disclosure not reform, again indicating the methodological failure between the realities of governance and the ratings perception.

D. Case III- Infosys Ltd.

In contrast, Infosys represents an example where high ESG ratings correspond to strong governance performance. Infosys consistently held an “AA” ESG rating (MSCI, 2024) and a “Low Risk” score (Sustainalytics, 2023), based on strong governance structure, such as a majority independent board, active whistle-blower system, and transparent auditing practices.[30] Academic reviews have noted Infosys’s integration of ESG principles into its core governance charter, including direct board oversight over ESG strategy and compliance.[31] This leads to the conclusion that where governance substance exists, it is credible to state that ESG ratings are indicative of the quality of governance and corporate integrity.

E. Comparative Observations

A cross case comparison shows that Indian ESG ratings are not sensitive to governance controversies unless these are accompanied by legal penalties or major reputational issues.[32] Across the three firms studied, the average RDR (the difference between the perceived ESG governance score and observed governance risk) was in excess of 0.35, signifying a 35% disconnect between perception of sustainability and actual governance.[33]

In India, ESG rating agencies rarely downgrade ratings even after serious governance problems in the company, indicating slow response and not changing their methods fast.[34] Because of this, companies can still look good in ESG ratings even when their governance is actually weak. This projects a wrong picture to investors and stop them from making informed decisions.[35]

CHAPTER IV: Comparative Global Perspective: Regulating ESG Ratings and Governance Accountability

The debate surrounding the reliability of ESG ratings is not confined to India. Jurisdictions across the European Union (EU) and the United States (U.S.) have begun to recognize the structural weaknesses in unregulated ESG rating markets.[36] Comparative insights from these regions demonstrate how India can enhance transparency, standardization, and investor confidence through regulatory reform.

A. The European Union: From Voluntary Disclosure to Regulatory Oversight

The EU has taken the most comprehensive steps to provide formal oversight to ESG rating agencies. The European Parliament and Council came to a provisional agreement in 2024 on the EU Regulation on ESG Ratings.[37] The proposed framework provides for the authorisation and supervision of ESG rating providers operating in the EU by the European Securities and Markets Authority (“ESMA”).[38]

Under Article 5 of the Regulation the rating methodologies must be disclosed publicly, together with weightings for the Environmental (E), Social (S) and Governance (G) parts of the rating, data sources and a system of identifying and protecting against conflict of interests in rating.[39] This reform was driven by the 2022 Study of the European Securities and Markets Authority which revealed large divergencies in methodologies and obscure practices relating to ratings.[40] Moreover, significantly, the EU regulation treats the “G” part of the ESG prism as being considered significant to corporate integrity and independent verification of board governance, audit quality and anti-corruption measures are required. The EU framework moves thus in the direction of legitimising corporate governance from a regime of voluntary sustainability narratives to a regime where governance is validated by evidence of governance performance measures.

B. The United States: SEC Scrutiny and Market Accountability

The SEC of the United States has also become focused on ESG disclosures and the transparency of rating agencies. The SEC, for example, proposed its “Enhancement and Standardization of Climate Related Disclosures” rule in 2022, which requires publicly traded companies to disclose significantly more detailed information about oversight, board responsibility, and risk management of ESG factors, his codes of governance.[41]

While the SEC does not itself regulate rating agencies, its Division of Examinations (2023) issued guidelines to investment advisers who use ESG ratings, indicating the avoidance of “greenwashing” and misrepresentation.[42] As a result, the U.S. implements its policies through disclosure of facts and market accountability, with the possibility of liability under the Securities Exchange Act of 1934 for misleading ESG statements.[43]

In addition, the U.S. Department of Labor (2022) permitted ERISA fiduciaries to take into account ESG factors only in cases of demonstrable financial significance, rather than allowing ESG to be used symbolically or for reputational benefit.[44] As a consequence this results in ESG governance being included within the fiduciary duty of care and loyalty, and thereby links governance and sustainability to legal liability.

C. The Indian Context: Fragmented Oversight and Methodological Inconsistency

Conversely India remains largely self-regulated with respect to the ESG regulatory environment. The Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Report (BRSR) in 2021 and later BRSR Core Framework in 2023 for corporate sustainability disclosures in boiled down form.[45] However, these instruments cover companies mostly but not rating agencies. ESG raters in India- CRISIL, CareEdge, MorningStar India etc) operate without any licensing, regulatory oversight or standardized methodology.[46]

SEBI’S consultative paper in February 2023 recognized the “urgent need for transparency and reliability in ESG rating methodology”[47] However, implementation of this research paper is yet to be done, thus leaving a regulatory void during which inconsistent and disclosure-biased ESG ratings will continue to be there.

Unlike EU India does not have a central supervisory authority to take care of rating agencies dealing with ESG ratings, and unlike U.S no liability for disclosure is permitted in respect of misleading ESG claims, which has resulted in ESG scores often remaining opaque, un- comparable and governance week allowing companies with weak governance systems to have strong narrative on ESG.[48]

D. Comparative Observations

The comparison reveals that India’s ESG regime prioritizes disclosure quantity over governance quality, while both the EU and U.S. frameworks emphasize verification, accountability, and comparability. If such reforms do not take place in India, ESG will be a formality showing compliance and not a true indicator of governance.[49]

CHAPTER V: Key Findings and Policy Recommendations

After the analysis, it has been established that on one hand the ESG ratings are not in harmony with actual best practices in corporate governance in India while on the other hand this misalignment is creating problems for investor confidence, challenging the credibility of the law makers and resulting in neglect of ethical duties.

A. Key Empirical Findings

The findings are derived from the case analysis of (Adani, Vedanta, Infosys) and the comparative global study (EU-U.S.-India). Together, they show a clear pattern: ESG methods in India are not very transparent, and the regulatory system is not strong enough.

B. Thematic Insights

1. Disclosure ≠ Governance: Indian ESG ratings often reward quantity of disclosure rather than quality of governance.[56]
2. Governance Pillar Underweighted: The “G” pillar contributes only around 15-20% in most Indian ESG methodologies, creating systematic bias.[57]
3. Information Asymmetry: Investors and regulators depend on proprietary ESG ratings that lack transparency and standardization.[58]
4. Regulatory Vacuum: Absence of oversight allows conflicts of interest, particularly where rating agencies provide consulting services to rated firms.[59]
5. Global Learning: The EU’s ESMA-based licensing model and the U.S.’s disclosure liability approach could guide Indian reforms.[60]

C. Policy Recommendations

Based on these findings, five structured reforms are proposed for the Securities and Exchange Board of India (SEBI) and related stakeholders with rationale and expected outcome.

D. Implementation Pathway

A 3 Step Regulatory Plan can be used to carry out these reforms, which helps the process balancing feasibility with accountability:

E. Normative Implications

This analysis shows that ESG should not be seen only as a way to show that a company is good or ethical. In India, the law must ensure that the board concludes acts fairly, investors are well protected and rules are stable. Without this form of law, ESG ratings may just be hollow- looking good on the surface level but without any genuine governance.

So, the key point is in India with respect to ESG is ‘Substance matter more than appearance’ including openness, responsibility and transparency with current forms of reliable data.

CHAPTER VI: CONCLUSION

This paper concludes that India’s fast developing ESG scene is still weak internally in governance aspect. Although this era in development is buoyed by the advent of the Business Responsibility and Sustainability Report (BRSR) from an activist SEBI and more provision of sustainability discourse within governance realities in institutions, corroborative evidence suggests that there is vast disconnect between ESG ratings and the effective performance of the businesses in respect of good governance.

It is this dissonance that undermines investor confidence and additionally the fabric of the ecosystem of corporate sustainability sustaining in the India form of corporates. The essential effect of the research is again that Indian ESG ratings favour disclosure over diligence, rewarding quantity of ‘quality’ not ‘governance’ measure. Rating agencies are disconnected in their uninformative methodologies preferring to overweight environmental and social measures and not sufficiently weigh boards integrity, audit independence and accountability measures. Without regulation of the nature of statutory regulation, the issue of conflict of interest remains, the agencies offering consulting services to the firm’s which they themselves rate, an arrangement which contradicts fiduciary fairness and market integrity principles.

The comparative analysis with proposed EU and US models serves to draw attention to the urgent need for reform. The European Union claim of a proposed Regulation on ESG Rating Providers indicates (2023) that licensing, audit obligations and conflict of interest disclosures are likely to be provided. The Indian response is voluntary and disclosure driven. Unless SEBI moves towards introduction of an obligatory supervisory regime based on principles of transparency with evidence correlated verification of determinate governance and accountability measures, the ESG ratings are likely to become soft tools of green washing of a reputational kind rather than suitably appropriate tools of advantageous optimisation in a governance context.

The policies suggested such as the regulatory licensing of ESG providers, recalibrating the weights on governance in ESG scores, demands for transparency in methodologies, and coordination of SEBI and MCA aim collectively to realign India’s ESG infrastructure with global best practice. If implemented, ESG would change from being a metric of corporate virtue to a substantive governance instrument, aligning board ethics with investor protection and regulatory coherence.

Therefore, what we want is not just an economic change but constitutional change. When we think of governance linking sustainability to accountability, it echoes the purpose of Articles 21[61] and 48-A[62] , the right to live with dignity and the obligation of the State to guard the environment. A set of ESG thus with real empirical credibility and held by broad regulation would then be a constitutional instrument in binding private enterprise with the public responsibility.

In conclusion, what lies ahead for ESG in India is moving in the direction of the change from symbolic tick-box measure to concrete one, from voluntary measurement to measurable governance practice. ESG ratings can truly create value only when they are transparent, standardised, and properly monitored. They should not exist just for show or image building, but as a genuine ethical foundation, to truly support the corporate world or else it will be left as an illusion.